Salary sacrifice arrangements for employees

What is a salary sacrifice arrangement?

A salary sacrifice arrangement is also commonly referred to as salary packaging or total remuneration packaging. It is an arrangement between an employer and an employee, where the employee agrees to forgo part of their future entitlement to salary or wages in return for the employer providing them with benefits of a similar value.

Note: While we give details about how fringe benefits tax (FBT) is calculated, we do not give financial advice about accepting or rejecting a package. You should seek financial advice before entering into a salary sacrifice arrangement.

Reform of salary sacrificed 'in-house' fringe benefits

On 22 October 2012 the Government announced reforms to remove the concessional fringe benefits tax (FBT) treatment for in-house fringe benefits accessed through a salary sacrifice arrangement.

The measure applies from 22 October 2012 for salary sacrifice arrangements made after the announcement, and from 1 April 2014 for salary sacrifice arrangements made before the announcement on 22 October 2012.

The measure received Royal Assent on 28 June 2013.

What are the requirements for an effective salary sacrifice arrangement?

Arrangement before you perform the work

If the arrangement is put into place after the work has been performed, the salary sacrifice arrangement may be ineffective.

Agreement between you and your employer

It is advisable that you and your employer clearly state and agree on all the terms of any salary sacrifice arrangement. The contract is usually in writing, but may be a verbal one. If you enter into an undocumented salary sacrifice arrangement, you may have difficulty establishing the facts of your agreement. Subject to the terms of any contract of employment or industrial agreement, employees can renegotiate a salary sacrifice arrangement at any time. Where you have a renewable contract, you can renegotiate amounts of salary or wages to be sacrificed before the start of each renewal.

The contract of employment includes details of your remuneration, including any salary sacrifice arrangement. This contract can be varied by agreement between you and your employer.

No access to sacrificed salary

The sacrificed salary must be permanently forgone for the period of the arrangement. If a fringe benefit that has not been provided is cashed out at the end of a salary sacrifice arrangement accounting period, the amount cashed out is salary and is taxed as normal income.

Note: Salary and wages, leave entitlements, bonuses or commissions that accrued before the arrangement was entered into cannot be part of an effective salary sacrifice arrangement.

Similarly, if you direct your employer to make payments to a third party from salary that has been earned, for things such as health insurance premiums, loan repayments, union fees or credit card repayments, these payments do not constitute an effective salary sacrifice arrangement. They are made from after-tax or net amounts of salary.

What types of benefits can be included?

There is no restriction on the types of benefits that can be sacrificed. The important thing is that these benefits form part of your remuneration, replacing what otherwise could have been paid as salary. The types of benefits generally provided in salary sacrifice arrangements by employers include fringe benefits, exempt benefits and superannuation.

Fringe benefits

Common fringe benefits include:

cars

property (including goods, real property such as land and buildings, and shares or bonds)

expense payments (such as the payment of your loan repayments, school fees, child care costs and home phone costs).

Exempt benefits

A number of benefits are exempt from fringe benefits tax (FBT). The following work-related items commonly provided in salary sacrifice arrangements are exempt benefits:

a portable electronic device

an item of computer software

an item of protective clothing

a briefcase

a tool of trade.

The work-related items exemption is limited to:

items primarily for work-related use

one item per FBT year for items that have a substantially identical function, unless the item is a replacement item.

For more information about work-related items purchased at or before 7.30pm (AEST) on 13 May 2008, refer to Reportable fringe benefits.

Superannuation

Salary sacrificed superannuation contributions under an effective salary sacrifice arrangement are considered to be employer contributions which, when paid for an employee to a complying superannuation fund, are not fringe benefits.

However, superannuation contributions made for the benefit of an associate, such as your spouse, are a fringe benefit. Similarly, contributions paid to a non-complying superannuation fund will be a fringe benefit.

Implications of entering into an arrangement

As an employee, you need to be aware of how entering into a salary sacrifice arrangement with your employer will affect you:

you pay income tax on the reduced salary or wages

your employer may be liable to pay FBT on the non-cash benefits provided

salary sacrificed superannuation contributions are classified as employer superannuation contributions (rather than employee contributions) and are taxed in the superannuation fund under tax laws dealing specifically with this subject

your employer may be required to report certain benefits on your payment summary.

Assessable income

You only pay income tax on your reduced salary, but you receive the reduced salary plus the benefits. You can make employee contributions out of your after-tax income towards the cost of the benefits and reduce any reportable fringe benefits amount.

Under an effective arrangement, your income tax liability should be less than it would have been without such an arrangement. However, before entering into a salary sacrifice arrangement you should consider all of the associated costs, including the amount to be sacrificed and any surcharges or obligations that may arise from having the benefits reported on your payment summary.

Salary sacrificing a deductible expense

If, as part of your salary package, your employer pays for an expense which you would normally get a tax deduction for, your employer will not have to pay Fringe Benefits Tax on this expense. This is known as the ‘otherwise deductible rule’. If this occurs you will not be able to claim an income tax deduction for this expense in your personal income tax return. This is because the ‘deductible element’ of the expense has been taken into account when your employer calculates the taxable value of the benefit provided to you for FBT purposes.

Example:

An employer pays for the compulsory insurance of a ‘Death and disability scheme’ for their employees. Premiums are set at 1.8% of the income package and are paid under a salary sacrifice arrangement.

Income tax deductions cannot be claimed where an expense has been paid by an employer.

End of example

Fringe benefits tax

If there is any FBT payable on the benefits received, your employer is liable to pay that tax. However, as part of your salary sacrifice agreement, your salary may be reduced by the amount of FBT paid by your employer.

Certain employers, such as public benevolent institutions, health promotion charities and public hospitals, will not be liable to pay FBT unless the amount of benefits provided to an individual employee exceeds the relevant threshold.

Superannuation

Where contributions are paid to a complying superannuation fund, your earnings base may be reduced unless the salary sacrifice arrangement states otherwise. Your earnings base is the amount on which superannuation contributions made by your employer are calculated.

Reportable fringe benefits

If the total taxable value of certain fringe benefits received by you in an FBT year (1 April to 31 March) exceeds $2,000, the grossed-up taxable value of those benefits will be recorded on your payment summary for the corresponding income year (1 July to 30 June). Some fringe benefits, called excluded benefits, don’t have to be reported on your payment summary, although your employer still has to pay FBT on these benefits.

Grossing up reflects the gross salary that you would have to earn to purchase the benefit from after-tax dollars. This is calculated at the highest marginal tax rate, including the Medicare levy – that is, your employer multiplies the taxable value of the benefit by 1.9608.

The value of fringe benefits reported on your payment summary is known as your reportable fringe benefits amount. You will need to show this amount (or the total of the reportable fringe benefits amounts if you receive more than one payment summary during the year) on your tax return.

Although this amount is shown on your tax return, it will not be included in your assessable (or taxable) income or affect the amount of basic Medicare levy payable. However, the total will be used to calculate:

Sam, who earns $65,000 a year, is considering entering into an effective salary sacrifice arrangement. Under this arrangement, his employer will provide the use of a $35,000 car and pay all the associated running expenses of $11,500.

The salary packaging provider calculates that:

the taxable value of the car fringe benefit will be $5,950 if the car travels between 25,000 and 40,000kms in the FBT year, and

Sam will sacrifice

$14,205 if no employee contributions are made, or

$9,109 if employee contributions of $5,950 are made.

The following table illustrates how salary sacrificing and employee contributions work by comparing the net disposable income for Sam in three scenarios.

no salary sacrifice arrangement

a salary sacrifice arrangement without any employee contributions, and

a salary sacrifice arrangement where employee contributions are provided.

1. Salary only (no packaging)

2. Salary + car(without employee contributions)

3. Salary + car(with employee contributions)

Annual remuneration

$65,000.00

$65,000.00

$65,000.00

Less salary sacrifice

$NIL

$14,205.00

$9,109.00

Taxable income

$65,000.00

$50,795.00

$55,891.00

Less income tax (2015–16 rates)

$12,672.00

$8,055.38

$9,711.58

Less 2% Medicare

$1300.00

$1015.90

$1117.82

Income after tax and salary sacrifice amount

$51,028.00

$41,723.72

$45,061.60

Less employee contribution

NIL

NIL

$5,950.00

Less car expenses

$11,500.00

$NIL

$NIL

Net disposable income

$39,528.00

$41,723.72

$39,111.60

Reportable fringe benefits amount for employee payment summary

NIL

$11,666.76

(car fringe benefit taxable value of $5,950 x 1.9608)

NIL

End of example

Note: The above example illustrates how salary sacrifice arrangements can work. It is not intended to be advice, whether legal or professional. You should not act solely on the basis of the information in this example. Specific advice should always be obtained from your financial adviser.

TD 2013/20Fringe benefits tax: when an employer reimburses an amount of expenditure incurred by an employee to a third party, under a salary sacrifice (or similar) arrangement with that employee where that expenditure is notionally subject to Division 35 of the Income Tax Assessment Act 1997, is the amount included under subsection 35-10(2E) increased when applying the 'otherwise deductible rule' in section 24 of the Fringe Benefits Tax Assessment Act 1983?

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